A working capital loan would finance a company's day-to-day affairs, such as paying workers' paychecks and settling accounts receivable. Not all firms have consistent sales revenue year-round, and money may be required to keep systems running. This is common for businesses with cyclical economic cycles or recurring revenues, while others may demand a loan throughout holiday seasons or periods of lower commercial activity. Current loan size and the firm's financial well-being, such mortgages may be protected or unprotected, which means you may or may not be needed to put a certificate of deposit to obtain the loan. The operating capital of a corporation is equally important.
Did you know?
The economic viability and stability of a corporation are also reflected in its working capital. One could seek out a working capital loan to ensure that your company's operations run smoothly.
Working capital is the amount that a company uses to run during daily activities. An industry's ability to work successfully may be jeopardised if it does not have a free flow of operating cash. A working capital loan is a sort of corporate credit that can cover a company's short-term financial commitments and operating procedures. It is not intended to finance your corporate investment or equity investment objectives. The simple obligations could include monthly administrative payments through day expenditures, feedstock purchases and stock control. These are only a few of a company's short-term operational requirements. Our immediate needs are met with the help of a working capital loan, giving you more time to prepare and concentrate on your long-term goals.
Also Read: Learn About Various Types of Working Capital
When Should One Apply for a Working Capital Loan
A working capital loan is largely for small and midsize enterprises, as the loan term typically ranges from six to forty-eight months. This duration, meanwhile, varies from different banks. Financial institutions calculate the interest rate on a working capital loan in the same way. According to the Reserve Bank of India (RBI) criteria, the loan balance granted differs for different banks. Your business turnover is a parameter when determining the loan amount.
The Characteristics of Working Capital Loan in India
Amount of Credit
The amount of a working capital loan is determined by the company's needs, expertise and duration, and it differs and therefore is tailored to the company's specific cash obligations.
Rate of Interest
The interest rate on a working capital loan differs from account to account and is tailored to the lender's requirements.
There is no assurance of working capital loans being secured or not, which means you might and might not be obliged to fill out a certificate of deposit to get a loan. Land, stocks, metals, commodities and even the company can be used as collateral. The bank tailors the working capital loan to the borrower's collateral capacity. In the case of unsecured working capital loans, creditors check the credit history.
The mortgage payment process is tailored to the cash flow statement.
Another issue to consider is the age criteria for applying for a mortgage. The debtor must be at least 21 years old but not more than 65 years old.
Banks will charge a service fee whenever you request a working capital loan, and each bank will charge a different cost.
Scope of Application of the Loan
You may qualify for a working capital loan when you're an entrepreneurial, public or private corporation, general partnership, sole trader, MSME, self-employed specialist or quasi.
What Are the Different Types of Working Capital Loans Available?
Banks often deal directly with types of working capital loans. These are all the following:
- Cash Credit or Overdraft facility
- Loan for a specific period
- Guarantee from a bank
- Credit for packaging
- Letter of Credit
- Mortgage for Accounts Receivables
- Finance post shipment
Standard Important Documents Required for a Working Capital Loan
- PAN card belonging to a single partnership firm.
- Identification documents, such as a voter identification card, a passport, a driver's licence, or an Aadhaar card.
- Individual Address Proof: Passport, power bills, phone bills, Aadhaar account number.
- Proof of residential and business ownership.
- Proprietorship Proof- Financial records, tax returns and taxation challenges for the previous three years.
- Proof of Registration: Partnership agreement, incorporation articles and Shop Establishment registration.
- The existing loan's loan scheme letter.
- Photographs of the candidate.
Necessary Documents for Self-Employed Entities & Sole Traders
- A minimum of two years' worth of tax returns.
- A qualified chartered auditor's audited balance sheet and statement of financial position for the previous two years.
- The individual who has been borrowing the loan must submit a bank statement for the last six months.
- Financial records for the previous three months are included in the income statement.
Necessary Documents for Partnership Organisations & Private Companies
- An authentic chartered accountant audited the firm's or partnerships firm's financial statements for the previous two years.
- Documents from the previous two years' income tax returns.
- Statement from the bank for the previous six months.
- The company's 3-month bank statement is included in the income statement.
- The firm's partnership agreement.
- The firm's partnership authorisation letter.
- The Private Limited Firm's Memorandum of Association.
- The Private Limited Company's Articles of Association.
- The company's Board of Directors made decisions.
- The company's certificate of incorporation.
- The company's shareholding patterns.
Necessary Documents for Non-Professionals to Get a Working Capital Loan
- Proof of identity for a sole trader business.
- Individual evidence of identity.
- Income tax returns over the previous three years.
- Documents from the last three years' sales tax returns.
- Monthly inventory, liabilities and creditor report for the last three months.
- Bank statement for the last six months.
Based on your financial institution, parts of the paperwork may be skipped. You can acquire a working capital loan with much less documentation if you have a solid account with the business. Some fintech companies, such as Lendingkart, Bajaj Finserv, HDFC Bank and ICICI Bank, offer working capital loans with minimal formality.
The Working Capital Loan Example
Periodic or recurring firms frequently face the same need to overcome cash shortages. Companies need working capital loans to stay functioning throughout times of diminished economic activity due to periods of strong cash inflows followed by fairly modest cash inflows.
Inside the actual world, consider a company that deals with the production of Christmas trees. Because the desire for these kinds of trees would be much greater in the winter, they will need to crank up manufacturing operations in the summertime, if not sooner.
Nevertheless, since they may rarely sell many trees throughout the rest of the year, they will not have enough working capital to mobilise manufacturing from their usual commercial activities. As a result, they will request a working capital loan to start work in the summertime, and they will have enough money on hand to settle the working capital loan by the moment their high season arrives.
The Advantages of Working Capital Loan
- Working capital loans are typically quick and simple to obtain, enabling company owners to quickly meet any immediate cash demands.
- They are received all at once in a lump payment, which increases the funding's influence.
- Lending institutions can link working capital loan payments to the firm's cash flows, preventing the business from becoming overburdened during periods of low activity.
- Financial institutions can link working capital loan payments to the firm's cash flows, preventing the business from becoming overburdened during times of low activity.
The Disadvantages of Working Capital Loan
- To accommodate for the borrower's greater risk, interest rates are rather high compared to other kinds of bank loans.
- A working capital loan could be attached to a company owner's personal credits for tiny enterprises with really no track history of retained earnings and any missing repayment or failure that would affect the person's credit rating.
- Higher borrowing rates may make it difficult to support large-scale organisational endeavours.
How Can One Apply for a Working Capital Loan?
There are two methods for submitting a working capital loan request. You can go to the lender's official site, get the application form, fill it out and submit it.
Alternatively, one can go to the bank to deposit and obtain an application form, which you can subsequently return along with your documentation.
Make sure you meet all qualifying requirements before applying for the loan.
Working capital is a company's lifeblood. Each year, a good working capital leads to market growth. However, any mishandling of working capital results in losses and a decline in the company. It could be due to the lack of attention on the part of the personnel or a lack of liquidity. As a result, the only way to address it is to take out a working capital loan and cover day-to-day costs. A working capital loan is not taken to expand a firm; rather, it is taken to perform everyday business activities. This means it covers the costs of human resources and current capital.
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.